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ICICI Bank's Q4FY18 results (Outperformer) - Clean up provides comfort, CEO reiterates Board stance on Videocon

Q4FY18 result highlights

• ICICI Bank’s PAT of Rs10.2bn declined 50% yoy and 38% qoq.  Operating parameters were broadly in line. Key highlights were 1) the substantial rise in slippages triggered by the RBI circular leading to a large clean-up of disclosed stress 2) a strong growth in savings deposits of 8% qoq 3) NIM expansion of 10bps qoq driven by cash recoveries on NPLs/stress loans. 4) Upgrades/recoveries rose substantially to Rs42bn from Rs11bn driven by two large upgrades which we believe amounted to Rs28bn.
• Slippages rose significantly to Rs157bn from Rs44bn qoq as the RBI guidelines triggered a clean-up. Of the total slippage, Rs136bn was from the disclosed stress pool, Rs8bn was from Gitanjali Gems and Rs7bn was retail. Total stress loans now account for 11.6% of loans versus 12.7% qoq. Gross NPAs account for 76% of total stress versus 61% qoq.  Non-NPL stress has declined from 5% to 2.9% qoq.
• We believe slippage from the residual watch list of Rs48bn will be under Rs20bn. We believe the residual power stress is Adani which is unlikely to slip. Similarly a large portion of steel would be JSPL which is standard. Rs19bn of watch list, the non-fund stress of Rs33bn, S4A of Rs21bn and alternate SDR of Rs2.4bn will result in corporate slippage of Rs76bn from the disclosed stress pool in FY19. We do not have the quantum of below investment grade exposures to sectors other than the 5 watch list sectors but management indicated that no single exposure is more than Rs6bn including non-fund. We believe the max slippage from that pool would be around Rs25bn. For FY19, therefore, the total corporate slippage will be Rs101bn and including retail it would be Rs136bn against Rs287bn in FY18. Along with recoveries from NCLT cases, we expect GNPAs at 8.2% for FY19 and 6.5% for FY20.
• Management outlined a strategy till 2020 with targets: 1) proportion of retail to grow to >60% v/s 57% currently, 2) overseas loans under 10% v/s 12.6% 3) NNPA of 1.5% by Mar-20 and 4) consolidated RoE of 15% with standalone at around the same level by Jun-20. 

Valuation and view

We maintain OP as believe most of the stress has been upfronted and we see RoE expanding to 14% by FY20E. We marginally cut our TP to Rs370. We value the core business at 1.4x PBV FY20E and subsidiaries at Rs114 per share. The core bank trades at <1x PBV FY20E which we believe is attractive for ICICI’s strong retail franchise and declining stress.